Arkansas Severance Tax Revenue Down 50%, Natural Gas Drilling Hits Wall

Monthly and quarterly severance tax collections in Arkansas at the end of September have declined to levels not seen in several years as wellhead prices for natural gas have brought drilling activity in the Natural State to a virtual standstill.

The state’s drill-bit collapse has left tax revenue for natural gas production at only $3.79 million at the end of September, down 50% from $7.56 million a year ago, monthly tax data compiled by the Revenue Division of the Arkansas Department of Finance & Administration shows.

For the first quarter of fiscal 2016, or the three-month period ended Sept. 30, severance tax revenue collected on marketed natural gas sales plunged 54.4% to only $10.87 million, compared to $23.86 million in the same period in fiscal 2014. Arkansas’ fiscal year begins July 1.

Part of the Arkansas severance tax revenue is used for road improvements in areas that have more heavy vehicle traffic resulting from energy exploration and production.

DRILLERS DELAY COMPLETIONS
In the past, state revenue officials have said reported severance tax amounts are based on the “revenue month, not the report month.” But now with the number of Arkansas drilling rigs down to only four, most of the revenue collected is from wells already drilled but not completed.

Industry analysts say many shale-focused oil and gas companies are delaying production of completed wells to avoid sending cheap barrels of oil and natural gas futures to market below break-even costs. For example, Fayetteville Shale play operator Southwestern Energy cut the number of wells placed into production from 99 in the first quarter to only 65 at the end of June. Even with the effect of hedges, Southwestern’s average realized gas price in the first six months of 2015 was only $2.60 per thousand cubic feet (Mcf), down from $3.98 per Mcf in the first six months of 2014.

And although Southwestern’s hedging activity increased the company’s natural gas price by 47 cents per Mcf in the first half of 2015, those same protections could leave the Fayetteville Shale leader and other drillers exposed to high risk of financial stress, according to new energy company performance analysis from Wall Street research firm IHS.

“The North American E&Ps remain largely exposed to low prices in 2016, with just 11% of their total production hedged for the year, at hedged prices significantly below those locked in for 2015,” IHS oil and gas analyst Paul O’Donnell said in an Oct. 6 report. “For the smaller companies, the combination of less hedging and lower oil prices does not paint a pretty picture for 2016. Companies that missed the opportunity to lock in relatively higher oil prices during the second quarter of 2015 will face pressure to curtail drilling activity and CAPEX in order to avoid further balance sheet deterioration.”

O’Donnell also said IHS expects capital spending for the North American oil and gas companies will drop 25% in the second-half 2015, compared to the first six months, from approximately $60 billion to $45 billion. To date, Southwestern has invested $923 million in its drilling program, down from $1.3 billion a year ago. The Houston-based low-cost driller’s capital budget for the Arkansas shale play for fiscal 2015 is $560 million, of which $323 million has already been spent.

ARKANSAS NATURAL GAS DECLINES
Sales of marketed natural gas in Arkansas, which includes gas produced before associated liquids like propane and butane are extracted, have been on a steady downward path since April.

The state’s marketed natural gas production in July fell 12% from a year ago to 2.71 billion cubic feet per day (Bcf/d), the lowest level since January 2011, according to the U.S. Energy Information Administration’s monthly report.

Total U.S. marketed production for July was 79.47 Bcf/d, almost the same as marketed production of 79.42 Bcf/d in June 2015. That total, however, is up 4.9% from 75.56 Bcf/d of production in July 2014.

Natural gas futures closed last week on the New York Mercantile Exchange at $2.519 per million British thermal units. The market was closed on Monday (Oct. 12)  in observance of Columbus Day.